Can the EPFO be trusted with your PF? Doesn't seem so

Every year, millions of Indian workers and employees in the organised sector deposit crores of their hard-earned money with a decrepit and bureaucratic organisation called the Employees Provident Fund Organisation (EPFO). They do so in the hope that their money is invested wisely and generates enough returns to give them a survivable post-retirement lumpsum and pension income.

While the actual performance of their fund depends on the vagaries of the money market, prevailing interest rates, and the adroitness of their fund managers, the least a worker would expect is that the EPFO treats their money with respect and maintain proper accounts.

The final decision on what to pay will land on Finance Minister Pranab Mukherjee's desk. Reuters

Well, it's a fond hope. Over the last few days, newspapers have been reporting heated debates in the EPFO's Central Board of Trustees about whether the organisation should pay 8.25 percent, or 8.5 percent or 9.5 percent for 2011-12 - like they did last year. No prizes for guessing who wants more - the employee unions, of course.

The final decision on what to pay will land on Finance Minister Pranab Mukherjee's desk.

Paying employees 9.5 percent in a year of elevated inflation and high interest rates should normally not be an issue, but they have become one because the EPFO goofed up badly last year. It's accounts are messed up.

The story begins in 2010-11, when the EPFO pulled a rabbit out of its hat and claimed it had found a "surplus" in its "interest suspense account (ISA)", and asked the government to pay EPF subscribers 9.5 percent interest on their balances. The ISA is where the EPFO's incomes are parked before they are credited to EPF subscribers.

The finance ministry, which had no immediate way of verifying this alleged "surplus", agreed to it willy-nilly, but a couple of months down the line, the Comptroller and Auditor General (CAG) proved that this surplus was fictitious: it had simply been filched from some employees by not updating their entitlements.

Said the CAG report: "It was observed that interest on 47.2 million members' accounts were yet to be credited and were pending as on March 31, 2010."

At that time, the ISA had over Rs 4,671 crore as balance, but CAG threw up its hands and said it had no way of checking if the money was enough to pay all EPF subscribers. It said: "The actual interest liability on 47.2 million pending accounts is not ascertainable. In the absence of this, the adequacy of the above balance of Rs 4,671.83 crore to meet the future interest liability for pending accounts cannot be verified in audit."

Has the situation improved this year? The Economic Times says that till about a week ago, some 4.85 crore accounts were still to be updated. In short, the same mess as last year in updating records when the year ended in March 2011.

If this is how our retirement funds are being handled by a supposedly above-board EPFO, which has representatives from government, labour and employers, god help us.

In fact, far from having a "surplus" last year, it seems the EPFO had grossly overestimated its income for 2010-11, and ended up making a huge loss. Says The Economic Times: "More damning is the admission that it (the EPFO) had made a huge 5.7 percent error in its income estimates for 2010-11 that led to an eventual income shortfall of Rs 854 crore. Given that it now manages a corpus of Rs 4,66,000 crore, an error of this magnitude is alarming. With interest payments promised at 9.5 percent, the PF office ended up with a Rs 510 crore deficit on its 2010-11 operations - which it will now be forced to fund from its income for 2011-12."

Despite making such a hash of book-keeping - which is a serious case of fiduciary irresponsibility - there are no red faces in the EPFO's board of trustees.

In fact, the unions are trying to make things worse by arguing that the rate should be maintained at 9.5 percent this year since many workers have either forgotten their dues or have otherwise rendered their EPF accounts inoperative. BusinessLinequotes BN Rai of the Bharatiya Mazdoor Sangh as saying: "The EPFO could dip into the Rs 14,915 crore lying in inoperative accounts and are yielding returns." His Leftist colleague, Dipankar Mukherjee of Citu, says 9.5 percent can't be cut since EPF is a "social security scheme".

When unions are recommending that we rob other workers of their dues - though unclaimed for various reasons - we know that the EPFO has lost its ethical moorings.

Given the underlying irresponsibility in the EPFO - shoddy book-keeping, poor actuarial skills - it is obvious that workers need better options. In recent weeks, several economists and pink paper editorials have called for creating a provision whereby EPF subscribers can opt to move their funds to the National Pension Scheme (NPS), where one has the option to choose a fund manager and also the level of risk you want to take.

NPS offers the choice of investment in equity - which involves risk. But the risk of staying on with a numerically-challenged the EPFO are not any lesser.